Osmosis (OSMO), the Multi-chain Decentralized Exchange of the Cosmos Ecosystem

Osmosis (OSMO), the Multi-chain Decentralized Exchange of the Cosmos Ecosystem

Osmosis (OSMO) is a proof-of-stake blockchain entirely dedicated to its eponymous decentralized exchange. Thanks to its customizable design and its relationship with the Cosmos protocol, it is now one of the mainstays of multi-chain decentralized finance (DeFi). Its ecosystem includes classic features such as farming and innovations such as superfluid staking.

What is Osmosis (OSMO)?

Launched in 2021, Osmosis is a blockchain that is used as part of an automated market maker (AMM) protocol dedicated to the Cosmos ecosystem and its tokens. Osmosis aims to become fully customizable to facilitate exchanges between cryptocurrencies.

This blockchain was founded by two well-known engineers from the Cosmos ecosystem, Sunny Aggarwal and Josh Lee. Therefore, it is built with the Cosmos SDK (a suite of tools dedicated to developers) and uses the Tendermint consensus method. Osmosis is also the blockchain of the Cosmos ecosystem, which has really democratized the technology of “  Inter Blockchain Communication  ” (IBC), allowing the exchange of data between the different compatible blockchains.

Initially, Osmosis is a blockchain on which developers can build their own custom AMMs. However, as of this writing, only a few parameters are customizable when creating a liquidity pool.

Osmosis Logo (OSMO)

The Architecture of the Osmosis Blockchain

The architecture of the Osmosis network is very simple. It is a proof-of-stake blockchain built using the Cosmos SDK and using the unmodified Tendermint consensus method to secure itself. At the time of writing this article, there are 118 active validators out of a maximum of 219. A notable difference with other blockchains using Tendermint is the distribution of tokens. Indeed, the new OSMOs resulting from inflation are distributed to the validators once a day and not continuously during the production of new blocks, as is very often the case.

The Cosmos SDK and Tendermint were both designed as a solution for creating simple blockchains that combine security, speed and decentralization. The modification of one of these two technologies only occurs in the case of real need, which is not the case here. Indeed, for Osmosis, the development of its customizable AMM platform is at the center of attention.

How the DEX Works Today

Like UniSwap or SushiSwap, Osmosis uses an Automated Market Maker (AMM) protocol. This can be modified according to individual requirements. At the time of writing the article, there are only two customization options when creating liquidity pools: the ratio between assets and transaction fees.

The current version of the DEX uses a similar AMM model as Balancer. Unlike Uniswap, SushiSwap or PancakeSwap, this model allows users to create liquidity pools with customized ratios. In the case of classic AMMs, the only authorized ratio is 50/50 (a pool with 50% USDC and 50% ETH for example). With this new model, you can create a pool of liquidity according to your needs. If a user would rather be exposed to ATOM than OSMO, they can create a pool with 80% ATOM and 20% OSMO.

On Osmosis, transaction fees are also flexible. Users can create their pool of tokens by imposing the fees they want (the most common being 0.3% of each transaction). For example, although OSMO/ATOM pair charges only a 0.3% fee, while ATOM/ION pair charges 0.8%.

Figure 1: Overview of the interface of a swap on Osmosis

Future DEX Customization Options

Even if the customization options seem limited, many more will arrive in the near future. Indeed, all the parameters of the liquidity pools will be modifiable in the future:

Liquidity Pools with More Than 2 Tokens

Osmosis’ current model is not entirely the same as Balancer’s. The biggest difference is the number of tokens allowed per pool. Indeed, on Balancer, the user can create a pool with a maximum of 8 cryptocurrencies. This feature, similar to the creation of an index like the S&P500 for US stocks, is not available on the Osmosis DEX, which is currently limited to pools of 2 assets.

Configurable Liquidity Curves

Each liquidity pool will be able to follow its own liquidity curve in the future, which will reduce the slippage effect. For example, Curve uses a modified liquidity curve to reduce the slippage effect when swapping two similar assets (USDC to DAI or WETH to sETH), called the StableSwap.

The Osmosis Ecosystem

The Actors of Osmosis

Osmosis is a blockchain entirely dedicated to its decentralized exchange platform. We can find the three classic components of a proof-of-stake blockchain :

  • Validators: Osmosis has a set of validators whose role is to secure the network. They number 118 at the time of writing this article and can reach a maximum of 219. In accordance with the Tendermint consensus method, they are rewarded in proportion to the amount of OSMO in their possession;
  • Delegators: not everyone can be a validator due to the amount of OSMO needed to do so, the limited number of validators, but also the complexity of creating and maintaining a server. For these reasons, OSMO holders can delegate their tokens to validators and receive a portion of network rewards ;
  • Governors: in a blockchain like Osmosis, whose governance is decentralized, OSMO holders can vote on important decisions.

Beyond these actors, there are also roles specific to decentralized exchange platforms:

  • Traders are simply the users of the application. They exchange tokens for others by interacting with liquidity pools;
  • Liquidity providers delegate their assets to liquidity pools, thus allowing traders to use the application. In order to reward their delegation, they usually get back 0.3% of all transactions and can participate in farming.

Liquidity Mining

Like many decentralized exchanges, Osmosis allows liquidity providers to earn additional rewards. Users can delegate their liquidity tokens (representing their share of the liquidity pool) in exchange for rewards in the form of OSMO tokens, also known as liquidity mining. This allows the DEX to increase its liquidity and, therefore, its performance.

On Osmosis, an additional component is added: the liquidity token freezing period. The user has the choice between three periods: 1, 7 and 14 days. These freeze days are applied when the user decides to withdraw their liquidity tokens. During this period, the funds are blocked and not usable. The rewards increase as the freeze period increases, as shown in the image below:

Figure 2: Liquidity mining on Osmosis

Liquidity Bootstrapping Pools (LBP)

Another feature of Osmosis is called “liquidity bootstrapping pools ( LBPs)”. These are actually liquidity pools where the ratio between the two tokens in the pair is variable. This model is used in particular for initial sales of cryptocurrencies.

Protocols seeking to introduce their token via Osmosis can, for example, create a liquidity pool with an initial ratio of 90/10 in favour of OSMO. Over time, the ratio gradually drops to 50/50, so the price automatically drops. As the price goes down, buyers step in, and the value of the tokens begins to stabilize around the equilibrium price. This method allows tokens to be sold at a price chosen by the market.

Figure 3: Example of an LBP

In the example above, it can be seen that the initial LBP price of this token was $1.60, while the final price was set at $0.24. However, we can see that the market seems to have chosen $1.20 as the acceptable price for this cryptocurrency.

Superfluid Staking

In February 2022, Osmosis launched its “superfluid staking”, a real revolution in the world of DeFi. To understand what “superfluid staking” is and appreciate its importance, a focus on “liquid staking” is necessary.

Liquid staking is developed on certain proof-of-stake blockchains such as Polygon, Polkadot or Terra. Contrary to the classic delegation with which the delegated tokens are frozen for a certain time, the “liquid staking” allows the delegated tokens to remain liquid. The delegated tokens can then be used on DeFi applications on the network.

Superfluid staking is actually reverse liquid staking. OSMOs locked in liquidity pools are delegated to validators in the Osmosis network. This way, liquidity providers can take advantage of both trading platform rewards, and farming rewards, but also those related to securing the network.

Figure 4: Superfluid staking on Osmosis

What are the Roles of the OSMO Token?

The OSMO token is native to the Osmosis blockchain. It is what is called a utility token, that is to say, a token that one buys in order to access services. These services are multiple.

Since Osmosis is a proof-of-stake blockchain, OSMO holders can delegate their tokens to validators in order to secure the network. Today, Osmosis has 118 active validators, with a limit of 219. By delegating their tokens, the user secures the network while enjoying an annual return of 70% (at the time of writing the article). It is important to note that delegation and “superfluid staking” are different operations. The former is what is found on all proof-of-stake blockchains, while the latter functions as a boost applied when farming.

Like ETH on Ethereum or BTC on Bitcoin, OSMO is also used to pay transaction fees on the Osmosis blockchain. At the time of writing these lines, however, fees are optional. This is explained by the nature of the protocol, which also collects fees thanks to the exchanges made on the platform. It’s kind of a marketing operation to attract as many users as possible.

The governance of Osmosis has been decentralized since its conception. Because of this, OSMO holders have the ability to vote on important protocol decisions.

OSMO is also a liquidity token. On the Osmosis decentralized exchange platform, exchangeable tokens are mostly paired with OSMO, in the same way, that WETH is the majority token on the Uniswap platform. This liquidity dominance is due to the rewards given to users who provide liquidity on these pairs, especially in the form of OSMO (so-called liquidity mining).

The OSMO token is a largely inflationary cryptocurrency for paying delegators, validators and liquidity providers. However, OSMO emissions are reduced by a third every year, limiting the total number of tokens to 1 billion units.

Figure 5: Release of OSMO tokens over time

The Distribution of OSMO Tokens

Osmosis Fairdrop

Decentralization is one of the most important concepts for the Osmosis team, especially from a governance point of view. It is for this reason that OSMO tokens have not been sold in the traditional way by an “Initial Exchange Offering” (IEO) or by an “Initial Coin Offering” (ICO).

However, they decided in May 2021 to carry out a “fairdrop” for ATOM holders. This derivative of the “airdrop” makes it possible to reduce the gap in allocated tokens between large and small wallets.

According to the official details of this “fairdrop”, the amount of OSMO received per address was proportional to the square root of the number of ATOMs in its possession. Mathematically, a person with 2 times more ATOM will only receive 1.4 times more OSMO, thus reducing the advantage of large wallets. A total of 50 million OSMOs were distributed in this way, i.e. 50% of the tokens put into circulation during the genesis of Osmosis.

Fundraising for Osmosis

In 2021, as the value focused on the Osmosis blockchain explodes, the decentralized exchange platform attracts the attention of professional investors.

Initially reluctant to sell tokens, synonymous with governance, to investment funds, Osmosis Labs concluded its first private sale of OSMO in October 2021, unique to date, to the venture capital fund Paradigm. Osmosis raised more than $21 million during this fundraiser.

Osmosis Team and Partners

The Team Behind Osmosis

The creation of Osmosis was announced in September 2020 by its two co-founders, Sunny Aggarwal and Josh Lee. In 2021, they founded Osmosis Labs, a non-profit structure in charge of the development of Osmosis.

Before devoting themselves to the development of Osmosis, the engineering duo both contributed for many years to the development of Tendermint, the famous consensus method used by blockchains such as the Cosmos Hub, the Binance Chain or Terra.

Today, Osmosis Labs has 12 employees, according to its official LinkedIn page. These employees are the most regular contributors to the Osmosis blockchain. The Osmosis team is also responsible for maintaining the Keplr digital wallet, the cornerstone of the Cosmos ecosystem.

Sunny Aggarwal (left) and Josh Lee (right)

Osmosis Partners

Osmosis is the blockchain built with the Cosmos SDK that democratized the IBC. She is the first to have really taken advantage of this new technology. She is considered by many to be a mainstay of the IBC thanks to her usefulness but also for bringing her to the forefront.

For these reasons, many other projects seek to partner with Osmosis. This is the case with the Keplr wallet. It is maintained by the same team of developers and is built around the IBC, and facilitates cryptocurrency transfers between different blockchains.

In 2021, Sunny Aggarwal joined the Citadel.one delegation platform team as a consultant. This partnership comes with a view to offering a complete and ergonomic solution to Osmosis users, including portfolio, governance and delegation functionalities.

In January 2022, decentralized leveraged exchange Injective announced a partnership with Osmosis. This alliance allows Injective to connect with the rest of the IBC-compatible blockchains. Osmosis then becomes the main bridge connecting Injective to the rest of the Cosmos ecosystem.

Osmosis integrates CosmWasm in early 2022. This allows all developers coding with the Wasm language to build DeFi applications on the Osmosis blockchain. This partnership shows Osmosis’ desire to extend its field of action beyond the simple exchange platform.

How to Buy OSMO Cryptocurrency?

Osmosis is a blockchain dedicated to its decentralized exchange platform, and its team is also a big advocate for decentralization. For these reasons, it is impossible to buy OSMOs on centralized platforms.

The easiest way is, therefore, to buy OSMO on Osmosis. To do this, follow these steps:

  1. Buy ATOMs on a centralized platform like Binance (explanation below);
  2. Download the Keplr wallet in the form of a web extension (same principle as MetaMask) and create an account there;
  3. Transfer the ATOMs purchased on Binance to its Keplr wallet (the address must start with “cosmos”);
  4. Go to the Osmosis decentralized exchange platform;
  5. Connect with the Keplr extension using the “Connect Wallet” button;
  6. Go to the “Assets” page;
  7. Click on “deposit” on the line indicating “Cosmos Hub – ATOM”;
  8. Indicate the number of ATOMs to be exchanged for OSMOs and click on “Deposit ”;
  9. Sign the transaction in Keplr;
  10. Once the transaction is validated, you can go to the “Trade” page and exchange your ATOMs for OSMOs by clicking on “Swap” and validating the transaction with Keplr.

Explanations for buying ATOM on Binance

  • Register on Binance;
  • You will receive an email and need to click on a link to verify your account;
  • Deposit funds on the platform;
  • Click on the  Market menu  and search for the ATOM/USDT pair;
  • All you have to do is buy ATOM for the amount of your choice;
  • Congratulations, you are now in possession of ATOM tokens.

Ratings and Reviews on Osmosis and its OSMO Token

Osmosis presents itself as the AMM hub of the Cosmos ecosystem, and for a good reason. The Osmosis DEX is by far the most valuable DeFi application in the Cosmos ecosystem, with over $1.6 billion in total value locked. Thanks to its compatibility with IBC, Osmosis has become the go-to marketplace for multi-chain DeFi.

2021 has been a big year for Cosmos in general, which has seen a surge in popularity. In addition to the virtues that such recognition can bring, it also allows the development of alternatives.

Indeed, 2022 sees the arrival of at least two other blockchains connected to the IBC: Juno (compatible with Wasm) and Evmos (compatible with the Ethereum Virtual Machine). There are several DEXs such as Junoswap, Diffusion Finance or Exswap seeking to compete with Osmosis.

To face the competition, the Osmosis team plans to develop new features:

  • The creation of a DEX dedicated to stablecoins (similar to Curve Finance);
  • A focus on the confidentiality of transactions to limit market manipulation;
  • An integration with MetaMask to attract more Ethereum users.

Despite the rise of competition, Osmosis remains by far the most widely used blockchain in the Cosmos ecosystem. Like Uniswap on Ethereum, Osmosis DEX has become the default application for protocols seeking decentralised and multi-chain liquidity.

Disclaimer: The information in this article should not be considered financial advice, and FXCryptoNews articles are intended only to provide educational and general information. Please consult with a financial advisor before making any investment decisions.

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